An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Carol Ann Frost
State University of New York at Buffalo

Abstract: This study examines criticisms of the large, “nationally recognized” credit rating agencies (CRAs). The criticisms focus on these CRAs’ (1) disclosure practices; (2) potential conflicts of interest; (3) alleged anticompetitive or unfair practices; and (4) diligence and competence. This paper focuses on two questions. First, to what extent does empirical evidence support the criticisms? Second, what additional evidence might be useful? Although little rigorously-gathered evidence supports the criticisms, the absence of such evidence does not indicate that the criticisms are invalid. First, powerful tests related to potential conflicts of interest and alleged unfair practices are exceptionally difficult to design. Second, criticisms related to the adequacy of CRAs’ disclosure practices have not yet been, but could be, investigated by empirical researchers. Third, many criticisms are based on subjective benchmarks that are difficult to quantify.

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